A Burrito Built to Last: Burrito Chain Boloco Finds Stability After Tumultuous Period

Morgan LaBarre, of Norwich, Vt., adds filling to a burrito at the Hanover Boloco on Friday, Aug. 17, 2018. The Boloco restaurant chain has gone from losing money to making a profit once again after selling off money-losing restaurants and cutting overhead. (Valley News - August Frank) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com.

A tray of olives sits among Boloco's ingredients for burritos and bowls at the Hanover, N.H., location on Friday, Aug. 17, 2018. (Valley News - August Frank) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com.

Boloco employee Sixto Hernandez, of Hartland, Vt., prepares a bowl as Sierra Tiffany, of Sunapee, N.H., watches in Hanover, N.H., on Friday, Aug. 17, 2018. Employee average pay is expected to rise to $15 an hour by the end of the year as Boloco has become profitable. (Valley News - August Frank) Copyright Valley News. May not be reprinted or used online without permission. Send requests to permission@vnews.com.

Hanover — The Toshiba photocopier that is jammed into the corner of a back room at one of Boloco’s Boston locations might be a metaphor for the travails of the burrito restaurant chain the past few years.

Initially leased for $1,200 per month for the company’s corporate offices that overlooked Boston Common, it now shares space with restaurant paper supplies in a room that is reachable only by stepping through the kitchen at the Boloco near Boston’s Berklee College of Music.

And the machine’s lease payment has been renegotiated down to $750 per month, another sign of its ignominious status.

“We stare at it and I talk about it often,” said John Pepper, a Norwich Selectboard member and owner of Boloco, the nine-restaurant burrito chain he co-founded 21 years ago as Under Wraps and whose 14-year-old Hanover location on South Main Street is the company’s top-performing store.

He said he even tried to give the photocopier to the town of Norwich, but “they don’t want it.”

As Pepper sees it, the costly photocopier symbolizes the misguided mindset that once gripped his burrito restaurant business: ambitious expansion plans, a corporate staff too far removed from the nitty-gritty and little attention paid to superfluous expenses that were draining the company’s coffers.

That now feels like another era.

At its peak four years ago, Boloco, which Pepper launched with two friends shortly after he graduated from Dartmouth College’s Tuck School of Business, had 22 locations, 450 employees and $25 million in revenue.

The business plan was ambitious: to reach 60 locations by 2016.

But the fast growth was bought at a steep cost: Boloco was losing more than $3 million annually. Moreover, the fast growth, upon which the ambitious expansion plans were predicated, had slowed.

Overhead — much of it for covering expenses associated with a 14-person corporate staff — approached $4 million.

Today, Boloco is a much smaller — but finally profitable — business.

Pared back to nine locations, the restaurant chain now employs 140 people and has $12 million in sales.

Cash flow — a reliable indicator of fiscal health — is a positive $350,000 to $400,000 annually. Pepper describes the business as “responsibly profitable, although not acceptably profitable from a traditional investment standpoint.”

He said the restaurant hasn’t been hurt by the opening of creperie Skinny Pancake, which opened in 2016 and last year added waitstaff and introduced cocktails in its service.

Pepper now feels comfortable enough that the turnaround at Boloco has gained enough traction that earlier this summer he called off a search he had underway to hire a new president and chief operating officer.

Instead, he tapped two veteran Boloco insiders for the roles: Matt Taylor, vice president of operations, was named chief operating officer and Erin Childs, vice president of catering, was named president. They have been with the company 14 years and eight years, respectively.

Pepper, in announcing that he was pulling back to become chairman of Boloco and handing over day-to-day operations to Taylor — a Claremont native — and Childs, called his two colleagues “my Rocks of Gibraltar during the past three years as we fought for survival, relevance and purpose” and described himself as “selfishly relieved” that he could take a “short side-step over to chairman and owner.”

The management moves come nearly three years after Pepper rejoined Boloco in and bought back control of the company from an investor group to whom he sold a majority stake in 2007.

After selling control, Pepper had remained with Boloco until 2013, when a dispute with the board led to his very public and acrimonious exit. During his spell away from Boloco, Pepper pursued other activities, including driving an Uber taxi around Boston.

But when Pepper returned to Boloco in 2015, he found the business in jeopardy, employee morale low — work hours were capped and overtime was taken away in a cost-savings measure — and the company owed vendors, everyone from food suppliers to water utilities, $2.8 million.

Total liabilities were $14.6 million but assets totaled less than half that, according to a copy of Boloco’s balance sheet he once shared with the trade publication Fast Casual Magazine.

As an indicator of how close Boloco was to filing for bankruptcy, Pepper said he had managers running out to local bank branches multiple times during the day with pouches of cash from the register to deposit the money into the company’s checking account before 4 p.m., to make sure enough funds were on hand that day and not wait to be credited to the next day’s balance.

One big action Pepper took to stabilize the company was to sell off eight of the restaurants — five of them to “farm-to-table” restaurant chain B. Good, which was founded by a former Boloco employee — for $2.5 million, which raised needed cash to pay an investor note (leases were allowed to lapse on two other locations and a third was closed),

The sale of the restaurants meant that Boloco no longer required a corporate support staff to help manage what had been a much larger enterprise and was costing the company millions each year to maintain.

The other action was to divide functions formerly handled by the support staff among the general managers of the chain’s restaurants. For example, the manager of the Copley Square Boloco now also handles payroll; Adam Friedman, the manager of the Berklee College of Music location and director of operations, now handles purchasing; the manager of the 50 Congress St. location is in charge of maintaining the Snapchat social media postings.

What’s more, the general managers are all paid more for picking up the additional duties, Pepper said, at the same time overhead costs have been reduced by 75 percent.

The fact is, Pepper points out, Boloco could be a lot more profitable if it were not because the company pays $2 to $3 more per hour in wages than is the norm for restaurant workers. The average wage at Boloco today is $14.50 per hour, versus an industry mean wage of $9.54 per hour for the comparable job category, according to the U.S. Bureau of Labor Statistics.

“For years I’ve felt that businesses that use the legal ‘right’ to underpay its people as a crutch for success or survival don’t actually deserve to be in business,” Pepper explained in post he recently wrote on his personal blog. “I do at times remind myself, however, that were we paying market wages we would likely consider Boloco to be quite successful financially.”

But those higher wages — Boloco is targeting $15 per hour by the end of the year — has meant an additional $2.5 million in expenses for the company over the past three years.

That is money that, if Boloco were not committed to meeting “livable wage” standards for its employees, would fall directly to the bottom line and fatten the company’s profits.

“The typical thing you hear is ‘we’ll be in business first and then we’ll raise higher wages,’ ” Pepper said. But Pepper said he’s rarely, if ever, seen that turn out to be the case.

For him, paying workers closer to a livable wage — even $15 per hour totals only about $30,000 per year, which is a challenge to live on in high-cost areas like the Upper Valley and Boston — may not make economic sense from a business standpoint, but Pepper can also point to benefits.

For example, the average tenure for non-management employees is four years and for general managers 11 years, and eight of Boloco’s nine local general managers have been promoted from within the company. (The National Restaurant Association, using government data, reported that in 2016 annual employee turnover — workers leaving — was 73 percent, a figure which likely has been rising as the economy improves and people feel more secure about leaving their job for new employment.)

Another milestone that Pepper takes pride in is Boloco becoming a Certified B Corp. in 2016, joining such other Upper Valley companies as King Arthur Flour and Mascoma Bank. The designation, which requires reams of paperwork and documentation, recognizes businesses that balance social responsibility with the pursuit of profits.

But financially, Pepper said, he is hard pressed to say paying workers higher wages will result in higher profits for the company.

“People ask me what’s been the payoff,” Pepper related, wanting to know when the higher wages will be reflected in higher profits. Given the thin operating margins of the fast-casual food industry and the burden of absorbing the additional costs, Pepper acknowledges he can’t confidently predict there will be a “payoff.”